First-Quarter Earnings Are Now Expected to Really Suck

Declines not seen since the Financial Crisis.

With the first quarter done, the bean-counting begins. One thing is clear: Wall Street is now furiously trying to contain the damage.

Even analysts who estimate pro-forma, ex-bad-items, non-GAAP earnings that S&P 500 companies propagate to look better and that these analysts use to inflate their stock-price targets, just threw in the towel on the quarter.

They expect these inflated earnings per share for the first quarter to plunge 8.5% from a year ago, according to FactSet. If this holds after S&P 500 companies report their ex-bad-items earnings, it would be the worst EPS decline since Q3 2009.

It would also be the fourth quarter in a row of year-over-year earnings declines, a phenomenon that last happened during the Great Recession from Q4 2008 through Q3 2009.

These ex-bad-items earnings are always far better than the still beautified earnings reported under GAAP, which, given these trends, may be too ugly to behold.

And analysts’ earnings estimates always decline in the months leading up to the very days that companies report their earnings. By this strategy, analysts lower their over-optimistic ex-bad-items forecasts of earnings per share — after they used them to pump up their share-price targets – to something companies can actually beat. And Q1 is going to be tough.

So far, 121 companies have issued EPS guidance for the first quarter. Of them, 94 have slashed their EPS outlook and 27 have raised it. If no additional negative guidance appears, it would, according to FactSet, “mark the second highest number of S&P 500 companies issuing negative EPS guidance for a quarter since FactSet began tracking the data in 2006.”

Of the 10 sectors, only three are expected to report year-over-year earnings growth: Telecom Services (13.1%), Consumer Discretionary (10%), and Health Care (2.4%).

The remaining seven sectors are expected to report a drop in earnings, led by Energy (-102%). A decline in earnings of over 100% means that “earnings” for the sector overall will be negative, so a loss! And this loss does not include the billions of dollars in write-downs and other charges that companies will report under GAAP.

The earnings plunge in Energy is followed by Materials (-22%).

Next is Finance. At the beginning of Q1, analysts still thought earnings would grow 1.5%. Now they expect earnings to drop 8.5%. This will likely get worse as reporting dates approach.

Of the 90 companies in the S&P 500 Finance sector, 66 have been hit with downward revisions of their earnings. But the big banks have the biggest impact. FactSet:

However, the downward revisions to estimates for JPMorgan Chase (to $1.27 from $1.54), Citigroup (to $1.15 from $1.50), and Bank of America (to $0. 25 from $0.33) have been the largest contributors to the decrease in the projected earnings growth rate for this sector.

Revenues of the S&P 500 companies are now expected to decline 1.1% in Q1. If the last few quarters are any guide, reality will get worse as companies begin to report a “disappointing top line”: For example, at the end of Q4, before companies began reporting their Q4 results, revenues were expected to decline 3.2%. After everything was said and done, revenues as tracked by FactSet actually fell 5.5%.

And this worsening trend remains intact: at the outset of Q1, analysts still figured, inexplicably, that revenues in Q1 would grow 2.7%. Now they’re down to a decline of 1.1%. It would be the 5th quarter in a row of year-over-year revenue declines, a phenomenon that has never occurred since FactSet started tracking the data in Q3 2008.

Five sectors are expected to show year-over-year growth in revenues, led by Telecom Services (12.5%), Health Care (8.9%), and Consumer Discretionary (5.4%).

Five sectors are expected to show a decline in revenues, led by Energy (-29%), Materials (-8.7%), and Information Technology (-4.8%), which once again bashes the idea that “tech” is a driver of corporate growth. Much of what we think of as “tech” these days are consumer-facing apps that try to improve on humdrum services, like getting something delivered to the house or hailing a ride.

And the booming Telecom Services sector with revenue growth of 12.5%? That’s are mirage, caused by M&A.

With AT&T’s acquisition of DirecTV, revenues of the satellite TV provider switched to AT&T and thus became part of the revenues of the Telecom Services sector as tracked by FactSet. The combined company is expected to have sales of $40.9 billion in Q1. A year ago, prior to the completion of the acquisition, AT&T reported revenues of $32.6 billion. Without AT&T, thus eliminating the impact of DirecTV’s inclusion in the sector, revenues of the Telecom Services sector would edge up only 1.9%!

And yet, despite five quarters in a row of year-over-year revenue declines, and despite four quarters in a row of year-over-year ex-bad-items earnings declines, the S&P 500 soared over the past seven weeks and is near its ludicrous high established last May — another sign, one of many, of just how silly this whole Fed-directed charade has become.

Hello, the SP500 is a big bubble . Since 2009 three quantitative expansion , now repurchasing assets by the same companies . In addition to the zero percent rate .

‘ EVERYTHING IS A GREAT BUBBLE OF FRAUD AND LIES !!!

AC

Apr 3, 2016 at 3:13 pm

It’s almost like there is no longer a market capable of purchasing their goods and services.

I guess hordes of unemployed people, with no disposable income – an inevitable sequelae to ‘free’ trade, unchecked illegal immigration, and the absence of any adult supervision of corporate activity – does not comprise an environment capable of supporting positive earnings?

There is a parable about a goose that laid golden eggs. It’s a pity that the mothers of the various corporate executives, presumably, didn’t read it to their children.

Dino

Apr 3, 2016 at 4:39 pm

Dystopia -> With the Chinese and Japanese central banks openly buying stocks, this Ponzi has a lot longer to run. The fed will start opening propping up the stock market then when the real estate bubble finally bursts globally, I see central banks printing and buying to prop that up too until the majority of low and middle income housing is all nationalised. This should co-incide with the job losses from AI robots replacing all the jobs and globally we become one large centrally governed socialist population relying on handouts.

nick kelly

Apr 3, 2016 at 9:37 pm

Don’t hold your breath waiting for a bot that can cook your breakfast, change a tap washer etc. etc.
People grossly exaggerate the abilities of bots in the medium term- 10-20 years.

walter map

Apr 4, 2016 at 7:02 am

I’ve got a new bot in the pipeline that can automatically clean up corporate earnings reports. Just think of the savings on stock analyst salaries. Glad I thought of it first.

Next up: a CEO bot and a Federal Reserve bot. Shouldn’t be that hard to do. Now if I could only get one to update my Facebook page for me, I’d be golden.

Isn’t innovation wonderful?

CrazyCooter

Apr 6, 2016 at 1:43 am

They are called “cows” … just need to shove some hay in one side …

Regards,

Cooter

Agnes

Apr 4, 2016 at 7:50 pm

Back when the Federal Open market committee was a bit shy about conducting them openly (market operations)(2005 ish), I looked into the details of how it was done. For example: J.P.Morgan would be lent a billion or so dollars over a day or two at super low rates…they would intervene in the market and return the money and interest from their profits. But what if the Big Banks thought it was a poor time to be able to make a market…maybe they would not be interested…maybe they would say “no thanks”.

NOTaREALmerican

Apr 3, 2016 at 4:39 pm

The wealth effect will create more profits, don’t worry.

bud

Apr 3, 2016 at 6:51 pm

Of the 10 sectors, only three are expected to report year-over-year earnings growth: Telecom Services (13.1%), Consumer Discretionary (10%), and Health Care (2.4%).

Someone is dreaming. I know more and more who are dumping their fancy phones and do the a’la’carte cheap phone or giving it up completely. Yes, it is so. So Telcom, well I see no 3rd world countries busting at the Tardus door to afford a phone.

Oh yes, consumer Discretionary …sure could use another what-ever. This is BS.

A stage set is fantasy. Buy your ticket now for a front row seat.

OK, healthcare…unless it becomes a single payer the doctors will quit this new system of rape the consumer.

any questions? about wasted lives, wars, what is coming?

Let them all fall to their knees for the sin of lies, deception, thievery.

You already see the “future” to be presented by big Corporations on every media outlet to keep the dream alive a bit longer !
Future Rama ala the 50s! Buy now reap the returns in a decade? centuy?

Jonas

Apr 3, 2016 at 7:57 pm

The rising debt of sp companies worries me most. Every $ spent on a buy back now means that $ will have to be deducted from future earnings as debt it’s paid back. As these companies become more indebted, no one will want to hold them anymore. Just another factor that will worsen a future price crash, or asset least poison long term returns.

Now is not a good time to be long index funds. I’m invested in single names and land (forested acreage for timber, grassland leased out to a farmer). Now there’s a limited physical resource with stability!

J P Frogbottom

Apr 3, 2016 at 9:03 pm

After years of growth in earnings…we have had wages stagnate, no raises for minimum wage works since (I forget), but longer than I got a raise, and I’m retired!
What would you expect? People are squeezed by stagnant wages, and a rising cost of living. Ever notice our beloved ‘leaders’ get a raise whether they worked hard, or not. NOT seems to be in vogue of late in Washington, as well as many state houses.
If you want the economy to pick-up, then pick-up the prospects of those who work everyday. You might think to hold the line on Obamacare to the overall cost of living, that would be a start, huh? It’s mandated, but no cost controls.
Maybe a simple fix to our constitution that any Federal budget more than 3% in the red renders the re-election of sitting senate & house officeholders null – they MUST be replaced. Read that somewhere, food for though on where and how we allocate our scarce resources.
This country runs on business, and profits, let us make sure everybody has the opportunity to participate therein.

r cohn

Apr 3, 2016 at 9:34 pm

Don’t worry! Wall St will focus only on positive NON-GAAP earnings

NotSoSure

Apr 3, 2016 at 9:39 pm

Say it ain’t so, Wolf!!! With this and Harry Dent, the Dow’s really going to 30K for sure now.

Justification: earnings are so precious, any price is justifiable. We may be seeing companies with P/E of 10K soon.

Mike

Apr 3, 2016 at 9:48 pm

Yes Wolf, but although you’re correct on earnings, it’s already the case that stock prices and earnings are out of whack.

The financial crisis taught us that the FED will bail out everyone should the worst occur. I’m mean, does anyone beleive they wont? Weren’t there supposed to be four rate hikes this year?

I doubt there will be one.

This is the set up period as the bankers with inside info position themselves for the next step (whatever that is).
As long as there is cheap money for stock buy-backs I see no reason why stocks will not continue to rise.

And if that fails the FED will by equities (ala China).

And if that fails, the stock indexes will be faked and bloggers poor moral character arrested for inciting the public to sell stock.

The markets are rigged to grow, not blow. Of course a Trump or Sanders win would probably blow the markets.

NotSoSure

Apr 4, 2016 at 1:32 pm

I guess a more interesting analysis is at what point the debt burden is going to be so prohibitive that companies can’t buy back stock anymore even at super low interest rate?

Mark

Apr 3, 2016 at 9:56 pm

Wolfstreet is ringing the bell, which I truly appreciate. As a retail investor, I value these kinds of articles. Keep it up!

walter map

Apr 4, 2016 at 7:14 am

Oh please. Who needs earnings when you can get bailouts? Just hang loose, watch some Cramer, and wait for the helicopters.

Isn’t corporate socialism wonderful? Much too good for the common folk.

Paul Chesterworth

Apr 4, 2016 at 11:10 pm

June 13 crash next step down. Beginning of BIG step downward trend. Wish it were not so.